Clinton Should Consider a Simpler Tax Code

Another tax idea.

Photographer: Ty Wright/Bloomberg

Oct 12, 2016 8:00 AM EDT

Hillary Clinton already had an elaborate plan for tax reform. This week she added to it, again. She now wants to double, to $2,000, the tax credit granted to parents of young children, and to make it “refundable,” meaning that cash would be paid even to parents who owe little or no tax.

As it stands, there’s lot to be said for this idea. The rest of Clinton’s tax plan contains some good ideas, too. The problem, though, is a surfeit of ideas of every kind -- good, bad and indifferent. What the U.S. tax code needs most is simplification. That, it seems, is not among the candidate’s tax-reform priorities.

A refundable tax credit for low-income families is a fairly expensive proposal: It would cost on the order of $200 billion over 10 years. Yet it’s a cost-effective measure, because it’s well-targeted. (The child-care deduction suggested by Donald Trump isn’t refundable, so it’s worth most to the families that need it least.) The plan also has bipartisan appeal: Marco Rubio suggested something similar during his presidential campaign.

Tax reform, though, shouldn’t be judged piece by piece. That’s how years of incremental change have yielded an insanely complex system. A wide-ranging scheme of reform, such as Clinton’s, affords the opportunity to smooth out unforeseen incentives and unintended spikes in effective tax rates -- economic signals that send effort and investment in the wrong direction. She’s missed that opportunity.

Granted, Clinton’s approach is straightforward: She aims to raise taxes on the rich, leave taxes on middle-income households broadly unchanged, and give new help to low-income families. The simple way to do that would be to raise marginal income-tax rates for those on higher incomes and convert deductions into credits that deliver the same relief, in dollar terms, regardless of income.

Instead, the Clinton plan gives the code new layers, akin to the alternative minimum tax -- namely, a 30 percent minimum for taxpayers earning more than $1 million a year (the so-called Buffett Rule) plus a new 4 percent surcharge for those making more than $5 million. Her plan (like Trump’s) also proposes to close the notorious carried-interest loophole, which lets some rich taxpayers classify income as capital gains, taxed at lower rates. That’s good -- a simplification, as well as being fairer. Unfortunately, she also wants to add new bands to the capital-gains tax schedule (the longer the holding period, the lower the rate). This introduces new complications.

Clinton’s approach to corporate-tax reform is no simpler. Lower rates and a broader base would discourage tax evasion and strengthen incentives to invest for sound economic reasons. Instead, her plan leaves the basic flaws of high rates and a narrow base unmended, and proposes a battery of new rules to curb abuses. The error is obvious, and the current code proves it: Complexities are opportunities to game the system. Simplicity is desirable in itself, but it also serves the purposes of fairness and compliance.

Clinton’s goals of relieving poverty, making the tax code somewhat more progressive and reducing evasion are commendable. But those aims are better achieved by making the tax code less complicated, not more.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.